When you first dove into entrepreneurship, your initial thought may not have been to build a sellable business. Most people are driven by the "freedom" associated with self-employment, and it takes a staggering commitment to build something that is sustainable.
But, whether you're starting a new business today or have an existing one, Michael Gerber, author of The E Myth, suggests that the only reason to build a business is to sell it. This makes sense if you take emotion out of the equation, but we're human beings.
Selling something you've become attached to can be challenging and looking at it objectively might be a tall order. But every business owner would love to get top dollar when they walk away. This generally doesn't happen by chance.
You'll Get More for Your Business if You Plan Ahead
According to the annual data collected by BizBuySell, the number of businesses bought and sold hit record levels in 2018 but has slipped slightly in 2019 due to trade war questions. Even so, the recent quarters have been some of the most active in the past decade.
In the first half of 2019, nearly 5,000 small businesses changed hands in the United States. Also in the latest quarter, businesses sold for a record-high median sales price, and buyers appear willing to pay a premium for a proven business that has fundamentals to support continued success.
Even though the market is in an excellent position, few businesses are naturally staged for a top-dollar sale. Owners that plan ahead will always have a better sales experience. Even when you're actively running your business today, going through these steps to increase its value will put more money in your pocket when it's time to retire or move on to the next opportunity.
Lower the Risk Profile of Your Business
One thing buyers hate is risk. You might be accustomed to some of the risk associated with your business or industry, but anyone looking to purchase your business is going to be more sensitive to this. There are several ways you can lower your businesses' risk profile.
Diversify Your Revenue
Whether we're talking about customers, products, or vendors, it's nearly always preferable to diversify a business to lower its risk. If 90% of your businesses' profits rely on the orders from just one or two major clients, this might be viewed as an issue.
Likewise, relying on a single vendor to keep your operations running smoothly is risky as heck. Diversification lowers these risks and could make you look better than a less-diversified counterpart.
Establish Some Recurring Revenue Streams
Businesses that have recurring revenue are viewed as less risky - and gold mines. Unless the new owner does something drastic to screw up the business, they are guaranteed revenue from day one.
There are plenty of recurring revenue models (hard contracts, auto-renewal subscriptions, consumable products). Choose one that best suits your business, and established it pronto.
Cultivate High-Quality Talent
Your goal should be to pass along a company that has qualified and fully-trained employees. Anyone buying a business sees the value in having high-quality talent in place, since having to hire and train a new team would cut into profits.
You can build long-term incentives for employees, such as equity ownership with vesting over time or bonus plans tied to profits, that motivate them to remain in place after a business sale.
Improve Your Businesses' Cash Flow Position
No one wants to buy your business and then have to close it soon after due to money problems. The number one reason that small businesses fail (82%) is because of cash flow issues. Every small business owner should internalize this, and you can improve your cash flow position to increase the value of your business before a sale.
Increase Profitability (Duh)
It's common sense that a buyer will be willing to pay more for a company that can quickly generate profits as opposed to one that is struggling or producing diminishing returns. It also makes sense that, if you could make more money, you'd probably already be doing it.
But, if you can improve your margins, this is the time to give it your best shot. See if there are any untapped markets that you can "tap" that will produce better margins. At the same time, look for ways to improve the efficiencies of your operations, which might involve reducing overhead.
Have Perfect Books
Businesses with messy books will never get snapped off the market by eager buyers, and they often lose money without knowing it. If your "books" are a jumble of Excel spreadsheets, it's time to clean them up and chart a new course.
Clean up your Profit & Loss Statement and break out revenue sources under Income. Categorize your Operating Expenses so that they hit your Balance Sheet properly. If there are a bunch of miscellaneous and personal expenses running through the business, it's time to stop lowering your taxable net income and show your true profitability.
Spend some time putting together month by month budgets each year that compare projections to actual results. Show how your company performs relative to its peers and track its productivity and profitability growth rates.
Streamline Your Operations
Organized operations are less likely to have cash flow problems, and they're just more attractive to a buyer. There should be strict inventory management and controls in place as well as procedures for dealing with vendors. If you are collecting payments or making payments late, this is going to impact your cash on hand.
Set Your Business Apart from Its Peers
If you're going to increase the value of your business, it needs to look different from its peers - in a good way. Whether it outperforms the industry average, offers a niche product or service, or has an outstanding reputation, this should be a focus.
Consider Your Curb Appeal
This is an age-old tactic in the real estate world, but it applies to any brick and mortar business for sale as well - curb appeal matters. If a buyer is looking at two similar businesses, and yours looks a survivor of the apocalypse, you can't expect to get your asking price for the business - or even the sale.
There's plenty to be said for installing some new fixtures, springing for a fresh coat of paint, and upgrading some of the office furniture. When it comes to the exterior, take a look at your parking areas, signage, and landscaping for some possible improvements.
Freshen Up Your Website
Data and financials are essential, but so is your company's reputation. In today's digital world, this starts and sometimes ends with your online reputation. You only get one chance to make a first impression, and one of the first stops that many potential buyers will make is your company's website.
If you haven't dedicated some resources to this in a while, it's time. Your website should be engaging, visually-appealing, and clearly communicate some key facts about your business. These include what you do, why you do it, how and where to contact you, and what sets you apart from your competitors.
Build a Sales and Marketing Process
Sales and marketing is a vital part of a growing business, but it's also a weakness in many companies. Certain industries rely far too much on a few key relationships to stay afloat, and this works well until it's time to sell.
A buyer is going to feel more comfortable purchasing a company that has a proven sales and marketing process that is independent of the owner. In other words, there are processes and systems in place to generate leads and convert them into paying customers.
Become a Leader in Your Niche
If your business dominates a niche in its space, it's going to sell for top dollar, provided the rest of your operations aren't a train wreck. For example, let's assume you have developed a patented biodegradable packaging material that works with all types of CPG products. Or, maybe, you offer the only in-home and emergency veterinary service in town. These are attributes of your business to emphasize during a sale.
Some Red Herrings
A few things might be tempting to do to increase the value of your business, but they either won't get you too far or could hinder your efforts.
Reducing Owner Compensation
Sure, it makes sense that slashing owner compensation could improve your cash flow and margins, but any buyer is going to evaluate this based on what is considered "reasonable." Unless you're using that extra money to invest in new projects, this is just a distraction.
Paying Off Debt
There's nothing wrong with paying off debt, but it won't necessarily increase the value of your business. Look at this way. The value of your home is going to be the same whether you pay off your mortgage or keep the loan. This won't change the sales price if you put it on the market, but you'll have less cash on hand if you make this choice.
Taking Unnecessary Risks
Unless you have a good reason for doing so, avoid taking unnecessary risks such as opening a new store, launching a new product or service, or taking on new debt. Of course, businesses do these things all the time, but they need to make financial and strategic sense, particularly if you have an exit plan in place - which you should.
Avoid Waiting Too Long!
Selling a business can be a counterintuitive process. It's ironic to think that the best time to let go of your business is when it would be the furthest thing from your mind. Who wants to sell their business when revenue is at record levels?
Too many business owners make the mistake of waiting just a bit too long to think about moving on. Buyers are smart. Not only do you need to sell when the market is good, but also when you have something worthwhile to offer - something that will turn those tire-kickers into people willing to offer you top dollar.
Every business needs an exit and transition strategy. Hunter & Associates, P.A. helps small to medium-sized businesses, start, grow, and exit their industries through proactive planning and execution. Contact us today to learn more about how we can help you take charge of your destiny.
At Hunter & Associates, P.A., we provide professional advisory and consulting services that are structured to fit your needs. Whether you need operations, financial, restructuring, organizational, or some other form of consulting, contact me now to learn how we can help you achieve your goals.
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